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Mid-caps stocks, like NovoCure Limited (NASDAQ:NVCR) with a market capitalization of US$5.7b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at NVCR’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into NVCR here.
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Does NVCR Produce Much Cash Relative To Its Debt?
Over the past year, NVCR has ramped up its debt from US$149m to US$164m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$257m to keep the business going. Additionally, NVCR has produced cash from operations of US$11m over the same time period, resulting in an operating cash to total debt ratio of 6.5%, meaning that NVCR’s operating cash is less than its debt.
Can NVCR pay its short-term liabilities?
Looking at NVCR’s US$71m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.73x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio greater than 3x may be considered high by some.
Does NVCR face the risk of succumbing to its debt-load?
With total debt exceeding equity, NVCR is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since NVCR is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
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Although NVCR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how NVCR has been performing in the past. You should continue to research NovoCure to get a more holistic view of the mid-cap by looking at: